It is becoming increasingly apparent that there are two separate markets for assisted living properties between those we consider “A” properties and those that are “B” properties. We first separated out these two markets in 2012 (and did so again in our just-published 2017 Senior Care Acquisition Report) based on the properties’ age, size and location, and while there will likely be some “A” communities in with the “B” communities (and the other way around), it all evens out. The difference was stark in 2016, with “A” properties averaging $265,700 per unit, compared with $94,200 per unit for “B” properties. That difference of $171,500 per unit easily beats out 2015’s $110,100 per unit gap and even 2014’s of $142,500 per unit.
We have written the last few years of an exuberance (perhaps over-exuberance) among buyers in assisted living, where investors (many of them new to the industry) paid exorbitantly high prices to join the frenzy, even for the older, struggling properties. This widening gulf perhaps reveals cooler heads prevailed in 2016 transactions, showing they will not pay up for lower-quality communities. Not only did “B” properties decline in value, but the “A” property market saw its average price increase 7% from $248,500 per unit in 2015.
Investors are clearly still interested in (and will pay up for) high quality assisted living/memory care communities. Despite the high prices, the risk is usually lower, which is reflected in the average cap rate for “A” properties being 8.0% versus 9.0% for the “B” market. Not surprisingly, occupancy differed, averaging 91% for “A” properties compared with 84% for “B” properties. “A” properties were also more profitable, averaging a 33% operating margin, or 1,000 basis points higher than “B” properties at 23%, and pulling in approximately $18,600 per unit of EBITDA as opposed to just $8,800 per unit for “B” properties. In both of those measurements, the difference between “A” and “B” widened year over year.
